JCPenney (JCP) reports Q4 earnings Wednesday after the close, and JCP stock needs some good news — it hasn’t traded this low since 1980, over 33 years ago.
Profits aren’t on the radar, but hopefully revenues show the damage inflicted by Ron Johnson’s short reign as CEO is mostly behind the company.
Investors knew Mike Ullman’s turnaround wasn’t going to be easy. Since his hiring in April 2013, Ullman has gone to work righting the ship. The Q4 JCPenney earnings report should tell us how much further the recovery needs to go for JCP stock to move back into the teens. Down 43% year-to-date through Feb. 25, any good news should push investors to buy JCP stock — but that’s a big if.
It won’t be easy, but the current and former CEO knows a thing or two about running this company.
Q4 JCPenney Earnings Expectations
JCPenney is expected to deliver Q4 revenues of $3.86 billion on positive same-store sales growth of 2%, its first positive comparable since early 2011. Goldman Sachs was looking for 4% same-store sales growth based on a strong 10% increase in November. The fact it didn’t hit 4% means its sales are slowing faster than expected.
JCPenney reported these preliminary sales numbers in early February, however, so this shouldn’t affect JCP stock too much.
On the other hand, we don’t really know just how much it’s going to lose in Q4. Estimates vary from a high of $6.56 per share to a low of $5.60. The big question mark has to do with its promotional selling. Dillard’s (DDS) reported quarterly earnings of $2.69 per share on Monday, 30 cents short of analyst expectations. The cause: markdowns, which a lot of retailers employed over the holiday season in order to generate revenue. Dillard’s achieved 2% positive comps as a result of the markdowns, but at a very steep cost.
JCPenney looks to be headed down that very same road which isn’t good for gross margins, earnings and most especially JCP stock.
What Will Drive JCP Stock Higher?
Clearly a lot has to go right during the next 12 to 18 months for JCP to climb out of the hole it’s in. Here are five things absolutely essential to JCP stock moving higher:
- Gross Margins. JCPenney’s gross margins have averaged almost 38% over the past decade. In the first three quarters of 2013, they’ve been around 29%. If JCP stock has any chance of going higher rather than lower, it can’t deliver Q4 gross margins significantly lower than 29%. Some estimates, however, run as low as 27%. As long as they can move above 30% in the next two to three quarters, JCP’s survival is less in doubt.
- Online Sales. Absolutely critical to any retailer’s success, JCPenney’s online sales have been on a roller coaster ride the past four quarters, delivering growth of 24.5% in Q3 and then declines of 2.2%, 19.9% and 34.4% in the previous three quarters, respectively. Ullman has been on board since the end of Q1 2013; for the most part, its online business has done well since his arrival. Q4’s number will be something to watch. If it’s a double-digit decline, there’s a good chance JCP stock will be affected.
- Private Label. The first thing Ullman did upon rejoining JCPenney was to bring back St. John’s Bay, the company’s private-label clothing brand that Ron Johnson sent packing. St. John’s was a billion-dollar seller in its day, and early results have been promising both in stores and online. In addition, Ullman reworked the JCP Home brand and that’s also gained traction with customers. For positive comps to keep coming, it needs these brands to continue making an impression on existing, potential and former customers.
- Liquidity. Anyone who follows JCP knows that its most pressing threat is running out of cash. In early February, JCP said it will finish the year with total available liquidity in excess of $2 billion, which represents total cash plus the amount available on its credit facility. With operating cash flow in 2013 expected to be -$700 million and capital expenditures dropping dramatically in 2014, it should have enough liquidity for another couple of years, leaving Ullman with some breathing room. Not a lot, mind you, but enough to continue the turnaround.
- Sears. It’s OK to have doubts about JCPenney’s turnaround. However, I don’t think anyone in their right mind would consider Edward Lampert a better merchant than Mike Ullman. In the short time that Ullman has been back at the helm his management team have made many changes to the JCP business model and brand. Sears Holdings (SHLD), on the other hand, continues to slice and dice its business. Lampert has been in a decade-long turnaround with little to show for it. Another year of smart merchandising from JCP, and Sears customers will move over. That’s very good news for JCP stock.
Bottom Line for JCP Stock
JCPenney earnings in Q4 are going to be a mixed bag. There will be some numbers that Ullman can trot out as evidence the turnaround is working. There will be others — most notably a $1.2 billion annual loss — that will scare away all but the most seasoned investors from JCP stock.
I personally believe the upside is far greater than the downside at this point. If you have some fun money available that you can afford to lose, JCP stock makes a very compelling buy. In the months ahead, we’ll find out whether I’m right.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.